This paper analyzes “dual tracking”, a useful marketing tool to increase the valuation of a private company. In line with this paper, dual tracking only refers to the choice between M&A and IPO in later stages of the selling process. In spite of an increasing number of major dual tracks, the idea is still widely unknown. In particular the scholastic world has rarely picked up this subject. This lack of academic research motivates to
explore the concept in more detail. Thereby, the focus lies on the choice between M&A and IPO and on the interaction between the equity market and the M&A market. In this context, the key question is how the capital market reacts to an acquisition of a dual tracking firm.
Table of Contents
1 Introduction
1.1 Problem Definition and Objectives
1.2 Course of Analysis
1.3 Literature Review
2 Different exit strategies
2.1 Concept of Initial Public Offering
2.1.1 Definition and Process of Initial Public Offerings
2.1.2 Equity Market Development
2.2 Concept of Mergers & Acquisitions
2.2.1 Definition and Process of Mergers & Acquisitions
2.2.2 Mergers & Acquisitions Market Development
2.2.3 Reactions of Acquirers’ Returns to the Acquisition Announcement
2.3 Critical Comparison of Mergers & Acquisitions and Initial Public Offerings
3 The Concept of Dual tracking
3.1 Definition of and Rationale for Dual Tracking
3.2 Process and Procedures of Dual Tracking
3.3 The Chances of Dual Tracking
3.3.1 The Chances from the Target’s Perspective
3.3.2 The Chances from the Acquirer’s Perspective
3.4 The Risks of Dual Tracking
3.4.1 The Risks from the Target’s Perspective
3.4.2 The Risks from the Acquirer’s Perspective
3.5 Recent Dual Tracks
3.5.1 Saga Group plc
3.5.2 Praktiker Bau- und Heimwerkermärkte Holding AG
4 An Empirical Analysis of Acquirer Returns
4.1 Theoretical Implications
4.2 Sample Description
4.2.1 Selection of the Data
4.2.2 Characteristics of the Sample
4.2.3 Methodology of the Event Study
4.3 Results of the Event Study
4.3.1 Analysis of Acquirers’ Returns
4.3.2 Comparison of Different Acquirers’ Returns
4.3.3 Multivariate Regression of Acquirers’ Abnormal Returns
4.4 Critical Evaluation of the Event Study
4.4.1 Limits of the Sample
4.4.2 Limits of Methodology
5 Conclusion
Objectives and Research Themes
This paper aims to explore the phenomenon of "dual tracking" as an exit strategy for companies, focusing on the decision-making process between an Initial Public Offering (IPO) and a Merger or Acquisition (M&A). The primary research question addresses how the capital market reacts to the acquisition of a firm that has previously withdrawn its IPO, thereby evaluating whether dual tracking provides a valuation advantage.
- The conceptual framework of IPO and M&A exit strategies.
- The rationale, opportunities, and risks inherent in the dual tracking process.
- Comparative analysis of how market participants react to different target types.
- Empirical investigation of acquirer abnormal returns using event study methodology.
- Evaluation of market perceptions regarding "dual tracking" targets compared to private or public companies.
Excerpt from the Book
3.1 Definition of and Rationale for Dual Tracking
With dual tracking, the seller of a company pursues IPO and M&A plans simultaneously. First, this allows the seller to assess the interest in the company. Second, a competition between the public market und potential buyers is created which establishes a high price tension until later steps of the process. It is crucial to recognize that the tension is only created when “the prices offered by the public markets and trade buyers are going to be pretty similar”. This implies that both markets must be prospering. The listing decision is used as a minimum price guarantee for a potential M&A deal. This gives the target the possibility to compare the offered prices of the potential acquirers with the price expectations on the equity market. Acquirers have to offer fair prices in order to win the bid. Ultimately, this mechanism will lead to higher valuations. Third, it provides flexibility as to the exit path. "Historically, the two [IPO and M&A] have been contracyclical," says Edward Annunziato of Merrill Lynch International. "When public equity market valuations are high, you get less M&A activity. When equity market values are low, trade buyers come in and companies sell to strategic buyers." From this point of view, dual tracking also mitigates the risks of an IPO to be dependent on capital market conditions. In short, dual tracking allows the seller to keep literally speaking all doors open until the late stages of the process. In spite of the benefits of dual tracking, the process is costly and, therefore, not in every case a dominant strategy.
Summary of Chapters
1 Introduction: Introduces the concept of dual tracking, defines the research problem, and outlines the objectives of analyzing capital market reactions to IPO withdrawals.
2 Different exit strategies: Provides a theoretical foundation for IPO and M&A processes, comparing their mechanics, market environments, and the impact of target status on acquirer returns.
3 The Concept of Dual tracking: Examines the definition, operational procedures, and the strategic opportunities and risks for both targets and acquirers, illustrated by case studies.
4 An Empirical Analysis of Acquirer Returns: Details an event study based on 91 transactions to statistically assess how the market values the acquisition of dual tracking firms compared to other targets.
5 Conclusion: Summarizes the findings, noting that the capital market ranks dual tracking firms between pure private and public companies, while emphasizing the need for further research.
Keywords
Dual tracking, Initial Public Offering, IPO, Mergers & Acquisitions, M&A, Exit Strategy, Valuation, Capital Market, Cumulative Abnormal Return, CAR, Event Study, Market Reaction, Acquirer Returns, IPO Withdrawal, Corporate Finance
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on the "dual tracking" strategy, where a firm simultaneously prepares for an IPO and an M&A exit, and analyzes the market reaction to the acquisition of such firms.
What are the primary themes discussed in the work?
Key themes include the comparison of IPO and M&A exit paths, the strategic benefits and risks for the target, the perspective of the acquirer, and the empirical analysis of stock price performance around acquisition announcements.
What is the primary research objective?
The main goal is to determine how the capital market reacts to the acquisition of companies that have recently withdrawn their IPO, testing the hypothesis that this leads to specific cumulative abnormal returns (CARs).
Which scientific method is applied?
The study employs a daily event study approach to analyze acquirer returns, supplemented by multivariate linear regression models to identify determinants of these returns.
What topics are covered in the main body?
The main body covers the theoretical frameworks of exit strategies, the rationale and risks of dual tracking, case studies of recent dual tracks (Saga Group and Praktiker), and the quantitative analysis of 91 global transactions.
Which keywords define the research?
Key terms include Dual tracking, IPO, M&A, Exit Strategy, Valuation, CAR, Event Study, and Acquirer Returns.
How does the dual tracking strategy create competitive tension?
By keeping both the public market (IPO) and potential trade buyers (M&A) engaged simultaneously, the target company can force bidders to provide a higher valuation, using the IPO as a price benchmark.
Why are the findings regarding acquirer returns considered "unclear"?
The event study results showed insignificant CARs, suggesting that while the strategy is marketed as beneficial for the target, it does not consistently lead to significantly positive or negative reactions for the acquirer's shareholders.
What was the outcome of the Saga Group case study?
Saga serves as a success story where a dual track was effectively used until late stages to create market tension, resulting in a favorable sale to a private equity firm.
What lesson is drawn from the Praktiker case study?
Praktiker illustrates that dual tracking is not a guaranteed success; if one track (M&A) weakens or fails, the resulting loss of leverage can negatively impact the final valuation of the other track (IPO).
- Quote paper
- Michala Rudorfer (Author), Stefan Schoon (Author), 2006, Dual Track vs. IPO, Munich, GRIN Verlag, https://www.grin.com/document/125577
